Posts Tagged ‘cigarettes’

At the end of last year the ruling coalition studied some tax revisions for 2015 and decided to review the one for tobacco. The review mainly affects three brands, which remain cheap five years after cigarette taxes were increased considerably. These three brands — Wakaba, Echo and Golden Bat — are classified as “third-class tobacco,” which meant that their tax was half the portion levied on other cigarette brands. Apparently, the government wants to make the tax on these three brands equal to that for other brands.

The reason for the tobacco tax in the first place had nothing to do with health and everything to do with the notion that only well-off people smoked, which is the same rationale that governed the tax on alcohol. This was back in the middle 19th century. The government originally owned the tobacco monopoly and still has a hefty share of the stock in the nominally private Japan Tobacco, so the tax has always had a political dimension.

During the Meiji Era, when Japan suddenly decided it had to compete with the rest of the world, the authorities needed revenue fast, and tobacco was an easy way to get it. With the rise of the military and more involvement in foreign wars, the government supplied soldiers with free cigarettes in order to cultivate the tobacco market. Thus cigarettes became a classless commodity whose sales were spurred by its addictive nature.

As every smoker in Japan knows, the cigarette tax was raised in the fall of 2010. With ¥3.5 added to each cigarette, it means a pack suddenly cost at least ¥70 more, and as a result sales have dropped by about 20 percent. So-called sin taxes are double-barrelled: They have a behavior modification purpose of discouraging users from over-indulging, and they’re an easy political sell since the consumers (and maker/providers) usually aren’t considered a sympathetic or powerful constituency by the general public. Consequently, the government is thinking of adding another ¥2 per cigarette tax levy to help pay for reconstruction.

The suggestion has been tabled for the time being, though it will likely be revived. The main reason for the postponement isn’t so much Japan Tobacco, which has a monopoly on tobacco sales in Japan, but rather the farmers who supply JT. There are approximately 10,000 households that make a living from growing tobacco, and about 40 percent have said that they plan to quit since they see no future in the crop. The presumed reason is the tax and the trend for quitting, but many farmers say they are getting out of tobacco because JT asked them to. Since JT is obliged to buy all their product, these farmers no longer have a guaranteed future, and with the Trans-Pacific Partnership possibly looming on the horizon, there’s even less of an incentive to stick it out.

Tobacco, like salt and rice, used to be a government monopoly. That changed in 1985 when the monopolies were abolished and Japan Tobacco was established. Despite the change in nomenclature, JT pretty much continued to operate as a monopoly, since it had to buy all the tobacco produced and controlled all sales of cigarettes. JT determined the price of tobacco before each growing season, meaning there was never a market for the crop. This worked fine while sales were strong, but after they peaked in the mid-90s revenues steadily decreased. Starting in 2004, JT solicited tobacco farmers to retire, and about 20 percent did exactly that. The amount of farmland dedicated to tobacco decreased by about 10 percent. Last year, JT asked more farmers to quit the game, and the decrease in farmland was 30 percent.

1. Like a smoker trying to quit, Japan’s tobacco companies are having a tough time sticking to one plan of action following the Finance Ministry’s decision to raise the tobacco tax ¥3.5 per cigarette starting Oct. 1. In March, British American Tobacco Japan, No. 3 in sales after JT and Philip Morris, announced it would raise prices in conjunction with the tax hike, and then almost immediately withdrew its application from the FM, saying it needed to study the changing market environment further. Philip Morris did the same thing, only in their case they had already gained approval from the FM for a price increase.

Now BATJ has reapplied. On July 26, it submitted a new request to increase prices on all of its 62 brands on Oct. 1 from ¥110 to ¥130 per pack, including the ¥70 tax. A pack of Kools, for instance, which now costs ¥320, will go up to ¥440. Apparently, BATJ studied the situation and decided that instead of biting the bullet and trying to absorb the estimated 20 percent drop in sales that experts say will occur when the tax hike goes into effect, it will try to cover the loss with a price hike; except that they aren’t putting it in such clear, obvious terms.

According to media that have reported the price increase, BATJ said that the estimated loss in sales from the tax hike will mean higher per-unit production costs and so they have boosted the price to make up for it. The way I understand it, that means BATJ isn’t increasing the price in order to cover the loss of revenue caused by all those smokers who will finally decide to quit, but rather to pass on production costs, which, I suppose, sounds more acceptable. Whatever. The cigarettes will still be considerably more expensive.

2. In 2008, the Tobacco Institute of Japan introduced the TASPO card system to help prevent minors from buying cigarettes from vending machines. Smokers had to apply for and receive the card, which was needed to operate cigarette vending machines. However, for cigarette merchants the system is expensive and inconvenient, and a lot of smokers have just given up and buy their cigarettes over the counter.